Oct. 25 (Bloomberg) -- Singapore Exchange Ltd. agreed to
buy ASX Ltd., Australia’s main stock exchange, for A$8.4 billion
($8.3 billion) in cash and shares in a drive to compete with
Hong Kong and Tokyo. Shares in the Singapore company tumbled the
most in two years after the announcement.

The operator of Singapore’s stock market is offering A$48
per ASX share, 37 percent more than the company’s last price on
Oct. 22, the companies said. Shares in ASX closed below the
offer price at A$41.75 on concern the deal may not be approved
by Australia’s government or regulators. The two exchanges will
remain separate legal entities and be regulated locally.

The enlarged company will oversee $1.9 trillion of shares,
making it better able to compete with electronic trading
platform Chi-X Global Inc, which plans to open in Australia in
March. It will also vie for initial public offerings with Hong
Kong, which has attracted Asia’s four biggest initial public
offerings since 2006, including last week’s $17.8 billion IPO of
American International Group’s Asian unit. The exchanges expect
$30 million a year in savings to result from the deal.

“We see SGX’s acquisition of ASX as being richly priced,”
Srikanth Vadlamani, an analyst at Nomura Holdings Inc. wrote in
a note to clients. “The extent of cost savings implies to us
that the success of the deal hinges upon the combined entity
being able to realize material revenue synergies. However, we do
not see obvious revenue synergies.”

Shares in Singapore Exchange fell 6.2 percent to close at
S$8.95 in Singapore, the most since Oct. 24, 2008. The company’s
spokeswoman Magdalyn Liew didn’t immediately return calls
seeking comment on the stock’s decline.

‘Regulatory Hurdles’

ASX shareholders will receive A$22 cash and 3.473 new
shares in Singapore Exchange for every share they hold in the
Australian bourse operator, the exchanges said.

“The biggest issue for them right now is going to be the
regulatory hurdles,” Chris Weston, a Melbourne-based
institutional dealer at IG Markets, said. “Given ASX shares’
discount to the offer, traders are clearly erring on the side of
caution.”

Singapore Exchange Chief Executive Officer Magnus Bocker, a
former president of Nasdaq OMX Group Inc., will be CEO of the
combined company and Chew Choon Seng will be non-executive
chairman. David Gonski, chairman of ASX, will be group deputy
chairman, while Peter Hiom, current deputy CEO of ASX, will head
the Australian operation.

The combination, to be named ASX-SGX Ltd., will have
revenue of $1.1 billion and earnings before interest and tax of
$700 million, the companies said. With an estimated market value
of $12.3 billion, it will become the world’s fifth-largest
listed exchange company, they said.

‘Stronger Player’

Merging the Asia Pacific’s fifth- and eighth-largest
exchange operators will create a company overseeing $1.9
trillion of shares, compared with Tokyo’s $3.7 trillion and Hong
Kong’s $2.6 trillion. The companies expect the deal to be
implemented in the second quarter of 2011. The merger is in the
interests of both countries and the companies are confident they
will win regulators’ approval, ASX CEO Robert Elstone said.

“I’d expect any merger between the Australian Stock
Exchange and its Singapore counterpart to be closely scrutinized
by regulators,” said Tim Schroeders, who helps manage about $1
billion at Pengana Capital Ltd. in Melbourne. “Regulators will
want to ensure any merger upholds the integrity of the
Australian stock exchange and does not compromise it in any
shape or form.”

The combination will result in a more balanced portfolio of
listed companies, Bocker said. Morgan Stanley advised Singapore
Exchange and UBS AG is ASX’s adviser, the companies said.

“The world of exchanges is rapidly changing,” Bocker said
in Sydney. “This will make us a stronger player.”

‘Marketing Effort’

ASX posted a 13 percent increase in second-half profit this
year as trading accelerated on the back of a recovering global
economy. Net income rose to A$160.1 million in the six months
ended June 30, from A$141.7 million a year earlier.

Singapore Exchange posted net income of S$320.1 million
($247.2 million) in the year ended June 2010, compared with
S$305.7 million the year before.

“More than anything, this deal will help with the
marketing story to attract company listings,” said Simon
Bonouvrie, who helps manage about $1.8 billion at Platypus Asset
Management Pty. in Sydney, which owns some ASX shares. “The
tie-up, however, would also give listed companies easier and
more seamless access to deeper capital markets.”

Regional Competition

Competition in the region is increasing. Chi-X Global has
won preliminary approval to become a competitor to ASX. The
Singaporean bourse and Chi-X Global, part owner of Europe’s
largest alternative trading system, agreed in August last year
to start the first exchange-backed dark pool in Asia.

Companies have raised $37 billion in initial stock sales in
Hong Kong this year, almost seven times the total for the
Singapore and Australia exchanges combined, according to data
compiled by Bloomberg.

“HKEx will not pursue alliances, partnerships or other
relationships purely for investment gains,” said Henry Law, a
spokesman for the exchange, via e-mail. “HKEx will consider
selected opportunities in the areas where it can enhance its
capability and strengths in technology, business and services.”

Bocker Initiatives

Singapore Commodities Exchange, a unit of the Singapore
bourse, faces competition from the Singapore Mercantile Exchange,
which started operating in the city-state in August. SMX is
backed by Financial Technologies (India) Ltd., which operates
the largest commodity exchange in India.

Australia’s stock market is worth about $1.36 trillion,
compared with Singapore’s $558.2 billion, based on Oct. 22
prices according to data compiled by Bloomberg. Even so,
Singapore Exchange is the larger company, with a market value of
about $7.86 billion, compared with ASX’s $6 billion.

Since Bocker took over from Hsieh Fu Hua as CEO of
Singapore Exchange last year, the company has announced new
initiatives to enhance the bourse’s position as an Asian capital
markets hub. The exchange on Oct. 22 started trading 19 American
depositary receipts of Asian companies to boost trading volumes.

In June, the bourse said it will invest S$250 million in a
new trading system that will be the world’s fastest when it goes
live in 2011. The following month, Singapore Exchange and the
London Metal Exchange said they will introduce cash-settled
metals futures contracts by the first quarter of next year.